By Tiernan Ray

Shares of Nokia (NOK) are up $1.13, or 29, at $5.04, after the company this morning saidMicrosoft (MSFT) will purchase Nokia’s handset business, the “Devices & Services” business, for $7.2 billion, and license Nokia’s intellectual property, and that Nokia CEO Stephen Elop , who took over in 2011, will step down, returning to Microsoft.

The stock is down from the highs of the pre-market session, when it was up some 41%. Microsoft stock is down $2.07, or 6.2%, at $31.33, having deepened its declines as the session has progressed.

(In case you missed it, Reuters‘s David Gaffenhad an interesting item this afternoon about how heavy options trading on Friday is raising eyebrows about whether some people trading the stock knew what the broader market did not.)

The remaining Nokia will consist of the “NSN” telecom equipment division, a mapping technologies division known as “Here,” and a division focusing on development of “advanced technology,” including a trove of patents. The company will have $7.8 billion in net cash following the deal.

CNBC’s Carl Quintanillo just remarked a short while ago that Nokia stock is having its largest volume day ever, with 371,400 shares or more trading hands today.

R.W. Baird’s William Power, raising his rating on the stock to Neutral from Sell, writes that the sale can boost substantially Nokia’s profit:

Going forward, infrastructure will effectively be NOK’s primary business. Although the company has done a good job of improving infrastructure margins, that industry remains extremely competitive, with Ericsson and Huawei holding meaningful size advantage […] Accretive to EPS. Removing the devices business should be significantly accretive to EPS. NOK noted that its pro forma consolidated 1H’13 operating margin would have been 12.1% vs. a reported 4.2%.

Credit Suisse’s Kulbinder Garcha raised his rating on the stock to Neutral from Underperform, and raised his price target on Nokia’s ordinary shares to €4.80 from €2.25 to reflect his new sum-of-the-parts analysis:

New company structure to focus on infrastructure, maps and licensing; Nokia has noted that if we were to assume this transaction to have closed, its pro-forma numbers for new entity for 1H13 would have been sales of Eu6.3bn and clean OM of 12.1% (as opposed to Eu11.5bn of sales with 4.2% OM it delivered in 1H13 for the full company); If we were to put NSN on 0.5x EV/sales on our 2013 sales estimate of Eu11.8bn (OM of 9%), we believe NSN could be worth Eu5.9bn or Eu1.60 per share. For HERE, we estimate this to deliver sales of Eu950mn in 2013 with 2% OM; so assuming 0.5x EV/sales, it gives us Eu475mn of valuation for HERE, which implies Eu0.13 per share. Taking into consideration incoming cash from MSFT and outgoing cash to Siemens for NSN, Nokia has noted that it would have ended Q213 with net cash of Eu7.8bn (Eu2.10 per share); As part of the deal, Nokia will grant MSFT a 10-year non-exclusive license to its patents, with an option to extend it to perpetuity. We believe that currently Nokia generates ~Eu500mn of revenues pa from patents. Assuming nearly 100% margin for this, taxing at 26% and putting 10x multiple, we believe Advanced Technologies could be worth Eu3.7bn or Eu1.00 per share, bringing the total SOTP valuation to Eu4.80.

Bernstein Research’s Pierre Ferragu raised his rating to Market Perform from Underperform, with a $4.68 price target, up from $1.95 previously. Ferragu writes that he was wrong to assume no one would buy Nokia’s handset business, writing “Our Short thesis on Nokia has always been grounded on the assumption that nobody would dare to buy out a business of that size (56,000 employees) and in such a difficult position.”

“We recognize today we underestimated this upside risk.”

Ferragu thought Microsoft had been getting the best of Nokia without the costs:

Our analysis was that Microsoft had already secured all the support it could hope for from Nokia: The exclusive nature of the partnership assured in our view that Nokia had incentives fully aligned on Microsoft interest and Nokia’s good cash position was putting the company still years away from liquidity issues. This situation was granting Microsoft the best use of Nokia’s assets at the least expense. Microsoft’s board and management team don’t seem to share our perspective and have decided to go for this acquisition.

Nokia just made its operating structure a lot more appealing, writes Ferragu:

Instead of being stuck with a device and services business that would have burnt material amounts of additional cash in restructuring and barely returned to breakeven with the support of IPR revenues, Nokia offloads the problematic child to Microsoft (we estimate the P&L of the offloaded operation as follows: €15bn in revenues, 20% gross margins and 8% operating loss) and keeps a cost base that propels group operating margin on a 2012 pro forma basis to 8.5% Nokia is left with an interesting string of assets: A highly profitable patent portfolio: the licensing deal with Microsoft implies that Nokia will be able to continue to monetize its portfolio with the rest of the industry. The HERE operation, in which we have little faith but that will benefit from protected revenues from Microsoft and is therefore likely immune from bad surprises; Nokia’s new crown’s jewel: Nokia Siemens, a #2 player in the stabilizing wireless equipment market; An astonishing €7.8bn net cash on its balance sheet; We estimate the deal puts Nokia’s equity value between €3 and €4.8 per share: We estimate that the new Nokia is in a position to generate 29 cents of earnings in 2015. We see 10x this number as an absolute floor value for the stock, especially given the €2.15 of cash per share sitting on the balance sheet. On a sum-of-the-part basis, sticking to our valuation framework, we see €4.3 of value per share in this deal: €9bn for NSN’s equity with €2bn in net cash on its balance sheet, ~€0.9bn for Here, €2.2bn for the patent portfolio and Nokia’s excess cash of €5.8bn make €17.8bn, or €4.8 per share.

Oppenheimer & Co.‘s Ittai Kidron raised his rating to “Perform” from Underperform, writing that with the “drag” of the handset business gone, “the remaining Nokia businesses (NSN/mapping/IP) would immediately establish a much more stable and sustainable company with strong cash flow generation.”

Kidron focuses on the cash:

Post-sale Nokia would immediately move from a company with huge cash concerns to a large cash stockpile (potentially €7-8B net cash). It would also have good cash flow generation with the added benefit of licensing payments from Microsoft for Nokia’s IP. Strategic plan. Nokia’s board is yet to complete its strategic evaluation of the remaining business and name a permanent CEO, suggesting further moves could be made. Investors will likely push the board to return cash to shareholders, but we’d expect the board to deflect answering until it finishes its evaluation.

BMO Capital‘s Tim Long raised his rating on Nokia to Market Perform from Underperform, and riased his price target to $5 from $3, writing that “Nokia got way more for the device business than we would have expected.”

“NOK will basically move from what we viewed as a liquidity concern given the steadily negative cash flows from handsets to a capital return story based on wireless infrastructure, patents and HERE (formerly Navteq),” writes Long.

Long models $5.89 billion in value for NSN, $819 million for Navteq/HERE, and $1.8 billion for the intellectual property assets.

In addition to the ratings changes, there is a bunch of speculation today that Nokia may acquire other equipment makers to fill out NSN.

Ruckus Wireless (RKUS), the WiFi equipment vendor that has been a partner to Nokia, is up 38 cents, or almost 3%, at $13.97, has been one possible takeout name mentioned today, according to Briefing.com.

Nomura Equity Research’s Stuart Jeffrey, who has a Neutral rating on Nokia shares, wrote in a note a short while ago that Alcatel-Lucent (ALU) could be another target:

We are most intrigued by the EUR 1.5bn credit facility Microsoft has offered Nokia. Nokia had EUR 4bn of net cash before the closing of the NSN deal with Siemens. Post the Siemens transaction we estimate that the cash position is around EUR 2.2bn. This seems like sufficient operational cash for Nokia to manage its business for the next two to three quarters to us. Microsoft’s credit facility may, in our view, be used to accelerate strategic investments in the networks or mapping units. We have previously written that Nokia’s Networks unit may need to acquire an asset in North America given the company’s weak scale in both China and the US. We note that Alcatel-Lucent has classified its wireless unit as business being run for cash maximization. With EUR 4bn of annual revenue, a 0.5x sales multiple could see Nokia have to pay EUR 2bn for this asset – one that would catapult it to a strong number 2 in the US and boost its position in China.

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There are 3 comments

SEPTEMBER 3, 2013 12:42 P.M.

Douglas wrote:

Nokia short seller gat killed today Go Nokia Go! Nokia is the best stock ever I just make $18000.00 Yes! I but today 15000 shears more because Shorts need at list two day to get out mines buy to cover or bring more money what is almost impossible in this situation so Nokia is going nowhere but up plus positive annalistic updates’ will kip rolling.

SEPTEMBER 3, 2013 12:43 P.M.

Anonymous wrote:

Nokia short seller gat killed today Go Nokia Go! Nokia is the best stock ever I just make $18000.00 Yes! I but today 15000 shears more because Shorts need at list two day to get out mines buy to cover or bring more money what is almost impossible in this situation so Nokia is going nowhere but up plus positive annalistic updates’ will kip rolling.

SEPTEMBER 3, 2013 1:39 P.M.

HERE valuation wrote:

Analysts are way off the mark with the valuation of HERE. $500M? The only real credible competitor to (even better than) Google maps is worth only $500M? Try $5B.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.